Papua New Guinea (PNG) is experiencing weak economic growth resulting from falls in
major commodity export prices, the completion of the huge PNG LNG pipeline project,
and a severe drought. These developments have led to fiscal deficits and increasing
public debt as government revenues have declined. They have also led to foreign
exchange (FX) shortages and import compression, partly owing to large private debt
service outflows related to the LNG project. A new government, elected in July, is keen to
address the immediate fiscal challenges as well as longer-term structural reform.
A credible government commitment to substantial fiscal consolidation through the
medium term could mitigate the risk that financing of the fiscal deficit could become
extremely difficult, leading to a fiscal and financial crisis. In such a crisis, a severe fiscal
contraction would be likely and monetary and exchange policies would also be at risk.